Stimulus drawback likely on higher GDP growth

Advance estimates of national income growth released today by the Central Statistical Organisation (CSO) project it at 7.2 per cent in 2009-10, pegging it a notch below earlier forecasts of the Reserve Bank of India (7.5 per cent) and finance ministry (7.75 per cent). With economic growth back on track the government may initiate a phased withdrawal of the fiscal stimulus package.

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These growth projections for gross domestic product (GDP), however, come on a revised base of 2004-05. One consequence of this statistical change is that the fiscal deficit, calculated on a higher national income base, would be lower.

Further, with nominal GDP expected to grow 10.6 per cent at market prices against the Budget estimate of 10.05 per cent the fiscal deficit could come down by another 30 basis points compared to the 6.8 per cent estimated in the 2009-10 Budget. The fiscal deficit is the difference between the government’s total expenditure and receipts minus its borrowings.

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"If market prices are considered the GDP of around 10.6 per cent will provide a cushion of 30 basis points to the fiscal deficit," said Jyotinder Kaur, economist, HDFC.

The fiscal deficit as a percentage of GDP would then fall to about 6.1 per cent almost touching the 2008-09 level of 6 per cent.

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Finance Secretary Ashok Chawla said the economy will outgrow the projection given by the advance estimates and we would be looking at a higher growth in the revised estimates.

"This is an advance estimate. What we normally see when the final numbers come out for the third and the fourth quarter is that there is an upward bias and we are sure that this time also the same thing will happen," he told reporters.

Analysts see a growth rate of 7.2 per cent as "fair" "We had expected the growth to be 6.9 to 7 per cent for the full year. The good thing is that we expected a deep negative on the agriculture side and a 0.2 per cent decline is less than what we were expecting. On the valuation side, agriculture has not lost much due to high MSP and other factors," said Indranil Pan, chief economist, Kotak Mahindra Bank.

The advance estimates show that growth in 2009-10 is expected to be led by an 8.9 per cent expansion in the manufacturing sector, which had grown a meagre 3.2 per cent in 2008-09. Agriculture and allied industries are likely to contract 0.2 per cent against a growth of 1.6 per cent in the previous fiscal (2008-09).

"As much of the damage of the drought is expected to be felt in the third quarter , we forecast a decline in agricultural growth of -3 to -4 per cent , however, (in these figures) the CSO has factored in a remarkably strong Rabi harvest," said a report by HDFC Bank’s economic research team.

Economists state that even as manufacturing growth has help the overall growth rate, most argue that it is still not the right time to withdraw fiscal incentives provided by the government to boost the economy .

"I don’t think the government should withdraw fiscal measures based on these numbers as the demand-side scenario is not yet clear," added Pan.

However, Planning Commission deputy chairman Montek Singh Ahluwalia pitched for a phased withdrawal of stimulus in the budget. "We should say that the stimulus has succeeded and we should begin to phase it down. The fiscal deficit next year will be lower than this year," Ahluwalia said.

Growth in services, which accounts for more than half India's GDP, is likely to slow to 8.7 per cent in the current fiscal against 9.8 per cent in the previous fiscal. The fall is due to reduced expansion in financial services and community, social and personal services - the element that typically reflects government spending.

Trade hotels, transport and communications are likely to grow at 8.3 per cent during the fiscal as compared to 7.6 per cent in the previous fiscal. Financing, insurance, real estate and business services are expected to grow at 9.9 per cent while community, social and personal services are expected to grow at 8.2 per cent in 2009-10.

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In terms of GDP at market prices, Gross Fixed Capital Formation (GFCS) reflected the slowdown in the current fiscal with growth estimated at 32.3 per cent (at current prices) for the current fiscal against a growth of 33 per cent in the previous fiscal.

The country's per capita income will see a surge of 9 per cent during the current financial year to Rs 43,749 from Rs 40,141 during the previous fiscal.

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